twofish-quant said:
One thing about financial instruments is that they are convertible. Even if the bank calls it "fees" you can calculate an equivalent interest rate. If it's different from the prevailing interest rate, then there is financial incentive to change the fees to match the prevailing interest rate.
I understand why this is hard because I am not talking about any interest bearing instrument: I'm talking about the exact opposite. It's a concept that is completely foreign in many banking systems, particularly western ones.
The point of this is to put something in a bank that is a form of collateral that bears no interest and legally does not have any of the obligations that a credit agreement has.
Credit agreements work on the principle that there is a dependency between the creditor and debtor and there is some kind of shared "ownership" whereby the different terms dictate how the final ownership is transferred in terms of the underlying asset and the mechanism of credit.
I am not referring to anything based on this: the agreement is such that you pay up-front someone to manage your collateral and perform the function of doing exchange with other parties in same kind of way 3rd party exchange works.
The institution itself will have to figure out how it can take a portion of that collateral (for example if you have lots of silver or gold coins) and then come to an agreement with 3rd party institutions on how exchange will be done so that you can integrate into the existing system, but from the point of the person who owns the collateral not already tied up in an existing transaction (including a batch one), they legally own the rights to all other collateral that is being managed and that has not been transacted by the management for use of exchange between the management and a 3rd party (like the rest of financial system that uses the EFTPOS machines, ATM's and so on).
The key difference is that again, you pay the management up-front for management and you also pay up-front for transactions (you would do this in batch) where you surrender part of your collateral to be converted by the management for use in external transactions.
You pay for a premium for this privilege since you can always take out the remaining collateral at any time and if you don't pay an upfront fee to keep it managed, they must return the collateral back to you and it becomes your problem.
If it doesn't have anything to do with credit then I don't see what the point of
this exercise is. Presumably you have an asset (like a house), you want to convert
it to something else (like a hamburger). This involves converting it into an intermediate
instrument (like Federal Reserve Notes). In the process of doing this, someone is
going to keep records about what is owed. The language of those records are going
to involve accounting, and that involves credit, debit, assets, and liabilities.
There is a point to this.
Think about firstly a bank run. These institutions require a premium that protects against such an occurence.
In fact the whole point of the exercise is to protect people from the horrors that occur when dealing with credit. If credit works then fine, you will not "gain" what you could have and you will be stuck with dealing in costly transactions with 3rd parties which will be expensive.
But when the credit system goes belly up, you will have the advantage.
This is the point.
Mathematically they are the same. One thing that is important is that in most financial situations, you don't actually physically move the collateral. What you are moving are pieces of paper that confer ownership and borrowing rights.
This is not even close to being the same: this is not the same as a standard credit arrangement.
Also I'm not advocated moving collateral every time a transaction is made: one would look at the many 3rd party agreements between institutions involving exchange and do a form of a batch exchange where portions are converted to credit with the authority of the owner if they were to deal with credit-based institutions for doing financial transactions.
The person could do this themselves by simply buying gold and silver and cashing out when they want to, but the point of this is the same point that people put cash in the bank and not under their mattress.
The burger joint wants payment *now*, and in *money*. When I go to McDonalds, they demand payment in Federal Reserve Notes or credit cards that transfer cash. If I go to McDonalds and I show up with gold, bank IOU's, US treasury notes or anything other than cash, I'm not going to get my burger.
I've covered this above and I was aware of this.
There are lots of people that will take green slips of paper with pictures of dead presidents
on them. If you have a bank try to convert your assets into anything other than colored
paper, you will have problems with people accepting that to resolve a debt.
This is just plain wrong: the CME has announced it will take gold as collateral.
You have overseas trade outside the US that deals in gold and you have the PANAM in Asia.
You also have central banks buying up tonnes of gold themselves.
Some people are getting rather sick of the dead presidents don't you think?
Also people can liquidate gold and silver now very easily, especially when people want to buy it up. There is absolutely no problem with this now by a long shot.
If this thing is going to be useful, then you have to be able to convert assets into cash, once you do that, you've just gotten a secured loan.
The way things are structured now then yes, for transactions the transacted part of collateral that has been agreed to be transacted would be turned into some form of currency.
The point though is to have a firewall.
Even if the payment isn't specified in terms of interest, it can be mathematically converted into an equivalent interest rate. This happens all of the time with bonds.
This is not a mathematical thing: this is about having an entity that does controlled liquidity in a very specific way with collateral where you pay a premium to hold all the collateral and do liquidation again in a very controlled, specific manner.
If the market decided that this was popular then I'd imagine that people might transact in some other currency or other form, but that is not the issue here: the issue here is that you ask some entity to manage your collateral and pay them a management fee and then ask them to administrate the transactions where asking you up-front on how you would like to liquidate portions of such collateral so that exchange can be done with 3rd parties.
The way we do it know is through certain markets where gold and silver (and other forms of collateral) can be exchanged for whatever else, but the medium of exchange is not the issue here: the issue is the nature of the liquidation process and the nature of the management and transaction which is not what happens now.
If you want to convert this into cash, then it's a loan. If you talk about "collateral" then it's a loan, because without a loan somewhere, there is no point in talking about collateral. Now you can have a situation in which you pay a bank to safeguard valuables (i.e. coins in a safety deposit box), but that has nothing to do with collateral.
I think I have misused the word collateral and I apologize. Again I think I've explained the basic idea above.
If it's not a loan, then this doesn't make any sense. I give the bank the deed to my house. The bank gives me someone that I use to buy a hamburger. If I try to get my deed bank without repaying the assets that the bank used to by the hamburger, then the bank is going to be annoyed.
I understand that it's hard to grasp because people are so used to thinking about only credit which has the implication of a loan instead of a non-credit form of simple exchange.
All credit agreements have termination criteria so if you want to compare it to that, then the termination criteria is essentially instantaneous since the full scope of the exchange takes place immediately.
This is either a secured loan or a secured line of credit. The bank takes your thing of value, gives you cash which you can use to buy stuff. If you replace the cash that the bank has, you get your stuff back. If not, then not.
This is still a secured loan. The bank has to keep track of how much stuff you spent.
This is not a conventional loan: see the above comment. I do empathize that most people are not familiar with such a situation.
Right, and what you've just bought is a transferable letter of credit. You've just loaned money to the bank, the bank has given you a transferable IOU, you give the transferable IOU to someone else, and the bank pays back your loan to the person holding the IOU.
The point of the system is to settle the "loan" immediately if you want to call it a "loan". I'd equate it to the state of when a person pays their final house payment and the termination clause is met except that in this instance, all of this happens rather quickly.
In the US, people will prefer payment in US dollars versus bank letters of credit. For international transactions people will often prefer payment with bank letters of credit. So banks move things between the two depending on what you want and take a charge for it.
Yes that is the nature of 3rd party exchange: the medium is not important since any new medium can be invented depending on what happens.
That's fine. But you seem to be under the mis-impression that this has nothing to do with credit when it fact it has *everything* to do with credit. The bank cheque is an IOU from the bank to you (or the holder of the check).
When transacting, there will definitely be a credit arrangement of sorts for each transaction and I concede that.
The point though is that you have an entity that does controlled liquidity and management of your assets.
Here's the brief outline: in an uncontrolled credit environment you have the possibility of bank runs, huge defaults, and lots of crisis which can wipe out value that people may never ever get back in the case of a crisis or collapse.
In the situation I'm proposing, people will still have to do exchange and some form of credit will eventually come in but the point is to have someone who manages your stuff of value and tightly controls the liquidity of said stuff where they do not legally own your value of stuff (you don't pledge it in the normal sense) since you have to pay a premium for them to store it, secure it, and manage it and you also have to authorize them to do new batch transactions to convert said stuff to things that they can use to exchange with the outside world.
The entity has the responsibility of doing both the 3rd party exchange in whatever way it can (and hopefully the best way) and to administrate your valuable "stuff" in a controlled way.
The thing about pledging collateral for loans is that there are ownership issues and termination/default clauses for who gets assets (and in bankruptcy there are a whole lot of different issues regarding how such a situation is handled depending on who goes bankrupt and what they do for a living).
This issue doesn't exist in my situation: it's not the same thing. It's a completely different contract, and not the same kind of contract that someone signs in a normal situation that they do with a regular bank.
This may be minor, but it's really important.
It has its advantages and its disadvantages.
The disadvantage is that you have to pay to have your stuff administered and for the entity to set you up with a way to transact with other parties (like the burger joint with an ATM) and in a situation where the credit systems are sound and in good shape, you will lose a lot of potential advantages that you would other-wise have in the kind of institutions we have now.
The advantage is when things go belly up. You're stuff is still there and it will probably rise in value, but the exchange mechanisms are in place where you don't have to worry about what to do in the said situation. The security and management already exists as well so you won't have to worry about getting robbed when you are hiding your stuff under your mattress.
The other point is that having this means that if you have enough of these in existence, then you prevent more social deterioration since an organized exchange medium already exists. This is ultimately the most compelling point about such an entity and it's a primary reason for why I am suggesting it.
When you already have an organized body that is part of the system itself, then as long as you have that strong element there you minimize the kinds of social chaos that would ensue if it were not there as an alternative for people to use.
It has its advantages and its disadvantages but the main advantage is to handle a hundred year flood that really screws things up.
If you give security to the bank, and you get cash upfront, then it's a secured loan. If you pledge security to the bank and you get cash as needed then it's a secured line of credit. I have one of those using the value of my house as security.
If it's not a loan, then I don't understand what you mean by collateral. In standard banking language, if you don't have a loan, then there is no collateral anywhere. If you can't seize the asset in case of default, than it's not collateral. It's something else.
Also this makes no sense from the banks point of view. You've given the bank a thing of value. If you miss a payment, then the bank is likely to *insist* that they can seize the asset. Why should the bank take the risk that you are going to be a dead beat?
I'm getting very confused because you are inventing your own financial terms. By *definition* collateral is an asset that is security for a loan.
http://en.wikipedia.org/wiki/Collateral_(finance)
Inventing your own financial and accounting language makes no sense, because
when people get stuff from you, they are going to insist that you use the standard
terminology, which involves credit, debit, asset, liability. If the bank takes assets from
you then something is going to be entered on the books as a credit.
If things get that bad (and my parents have seen things get that bad), then none of this
matters. If you are at the point were you want precious metals, then there is no point
in talking about brokers, banks, collateral, assets, or transactions. At that point we are
talking about the law of the jungle. If things really get bad enough so that I need gold,
then I want the gold in hand. One family story involves my mother going to Taiwan as a
12 year old, and in order to keep some stuff away from the communists, my grandmother sewed pieces of gold into her overcoat. I think I may still have a piece, even though it
was illegal to own it in the US until 1975.
But if you are at that level, then this discussion is pointless, because if we are at that
level, then things have broken down that I'm just not going to trust putting my wealth
in *any* institution. The good thing about it, is that if things have broken down that
much, then tiny pieces of gold are going to be insanely valuable, and one nice thing about
gold is that you can have large amounts of wealth on your person.
If I am not physically holding the gold (i.e. it's not in my hands), then it's a "paper promise." I'm trusting that the person that is storing the gold will hand it to me. There are historical situations where this hasn't happened (i.e. Roosevelt in 1933).
1) This is not collateral.
2) It might be a secured line of credit which banks do all the time.
3) A lot depends on the nature of the asset. If you have gold coins, then you just pay the bank to hold it in the safety deposit box, and sell the coins to a coin dealer when you need cash. If you want to convert a house to cash, there are a lot of other issues.
And those involve loans and "letters of credit". When you pay money to a bank in exchange for a bank cheque, you are providing the bank with a loan, and the bank is giving you a letter of credit. When you deposit cash and get a bank cheque, the bank does not hold the money that you deposit and put it into a shoebox. It marks the cheque as a liability, and the money as an asset, and it can (and does) use that money to loan out.[/QUOTE]